Good morning, ladies and gentlemen, and welcome to Church & Dwight’s Second Quarter 2023 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company’s management may make forward-looking statements regarding, among other things, the company’s financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company’s SEC filings. I would now like to introduce your host for today’s call, Mr. Matt Farrell, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Thank you, operator. Okay. Good morning, everyone. Thanks for joining us today. I’ll begin with a review of Q2 results, and then I’ll turn the call over to Rick Dierker, our CFO. And when Rick has wrapped up, we’ll open the call up for questions. Q2 was an excellent quarter for Church & Dwight. Reported revenue was up 9.7%, exceeding our 7% outlook. And this is thanks to strong results from several brands, including our two most recent acquisitions, HERO and THERABREATH. Organic sales grew 5.4%. This exceeded our 3% Q2 outlook. Gross margin expanded 270 basis points and marketing as a percentage of sales increased 130 basis points. Two items that are worthy of note. First one is 18% of our global sales were purchased online, compared to 17.5% in the year-ago quarter. And second, private label is stable in our categories, both in the U.S. and internationally. Adjusted EPS was $0.92, and this was $0.14 higher than our $0.78 EPS outlook. And that result was driven by higher sales, higher-than-expected gross margin, and a lower tax rate. Now I’m going to comment on each business. First up is the U.S. The U.S. consumer business had 6.3% organic sales growth, and six of our 14 power brands held or gained market share in the quarter. And for context, the brands that grew share represent 65% of our U.S. sales. Now I want to look at a few of the more important categories in the U.S., starting with laundry. So laundry is a real success story in Q2. Church & Dwight closed out the quarter as the fastest-growing overall laundry detergent, liquid detergent, unit dose detergent, and scent booster manufacturer in both dollar and unit share. ARM & HAMMER liquid laundry continues to see strong consumption growth, driven in part by the continued trade down to value brands and in part by media support behind our new, 'Give it the Hammer' master brand advertising campaign. ARM & HAMMER liquid laundry detergent grew share by 90 basis points in the quarter, so we’re now at 14.5% share. And Extra, which is in the extreme value segment of the category, grew consumption 7.2% and gained 20 basis points of share in Q2. ARM & HAMMER litter also continues to perform extremely well with 12.6% growth outpacing the category and growing share. Consumers continue to choose ARM & HAMMER litter offerings, and our orange box, in particular, offers great value for the cost-constrained cat owner. Turning now to Personal Care. BATISTE grew consumption 12% in the quarter as we continue to build dry shampoo awareness and drive household penetration. While TROJAN delivered share growth and increased share to 68.3% in Q2. HERO, which was acquired last October, grew year-over-year consumption by 66%, gaining 4.7 share points to achieve a 17.2% market share in the total acne treatment category. The number of retail distribution points has tripled since we acquired the brand, and we still have room to run as we expand across all classes of trade. The HERO team is doing a spectacular job growing this business, and there continues to be a great deal of excitement at Church & Dwight about the HERO brand. Similarly, THERABREATH, which was acquired in 2021, is performing extremely well with 100% year-over-year consumption growth in the quarter. THERABREATH grew share of 5.6 points year-over-year to a 13% share of the mouthwash category. The mouthwash category grew 14% in the quarter, and THERABREATH accounted for 50% of the category growth. Distribution of THERABREATH has more than doubled since the acquisition date. So THERABREATH is now the number two non-alcohol mouthwash brand and the clear number three in total mouthwash. And we expect this brand to be a long-term grower for Church & Dwight. Regarding a couple of businesses that depressed our 2022 results, WATERPIK is stabilizing, with Q2 coming in close to plan, and this is similar to Q1. While VITAFUSION was close to our plan in the first half, our consumption was down in Q2, 9%, partly due to distribution losses at some retailers due to our supply issues in 2022. The good news is the gummy category was up 1% in Q2 after three successive down quarters. And our job now is to win back retailer confidence and then regain lapsed consumers. So we expect both businesses, this is WATERPIK and VITAFUSION, year-over-year to be flat net sales, so although not hurting us in 2023 versus 2022. Next up is international. Our international team is doing a great job, delivering organic sales growth of 6.1% in Q2, driven by broad-based growth in every one of our six subsidiaries in all five regions of our Global Markets Group. And finally, Specialty Products. Specialty Products organic sales decreased 6.5%, but this is primarily due to lower volume in the dairy business as lower-priced imports returned to the U.S. market. I’m going to wrap up my comments right now by saying consumption in our consumer products businesses is strong. A return to volume growth is expected in the second half. In fact, July is off to a very strong start. Our value offerings are performing well, as are our premium offerings. Acquisitions are on track. And because we had an excellent first half, and we have a strong outlook for the second half, we are in a position to significantly increase our marketing spend. Last year, we pulled back on marketing due to our fill rate issues. When we started 2023, we intended to increase our marketing from 10% of sales in 2022 to 10.5% of sales in 2023 and then 11% in 2024. So we now intend to ramp up marketing to 11% of sales this year in 2023. This is in support of our brands and new product launches as business gets back to normal. And now I’m going to turn it over to Rick to give you some color on Q2 and the full year and other investments that we’ll be making in the second half.

Thank you, Matt, and good morning, everybody. We’ll start with EPS. Second quarter adjusted EPS was $0.92, up 21% from the prior year. As Matt mentioned, the $0.92 was better than our $0.78 outlook, primarily due to continued strong consumer demand for many of our products and higher-than-expected gross margins as well as a lower tax rate. Net sales were up 9.7% and organic sales were up 5.4%. Almost half of the reported revenue growth year-over-year was HERO. Organic sales were once again driven by pricing in Q2 with volumes slightly down. That slight decline was better than expected, and turning to the second half, we continue to expect a return to volume growth. Our second quarter gross margin was 43.9%, a 270 basis point increase from a year ago, primarily due to productivity pricing and strong contributions from higher margin acquisitions that are offsetting inflation. This result exceeded our expectations for the quarter as we saw a greater impact from productivity programs, a better product mix driven by our recent acquisitions. Let me walk you through the Q2 bridge. Gross margin was made up of the following: positive 280 basis points impact from price/volume mix, positive 120 basis points from acquisitions, a positive 160 basis point impact from productivity, and 10 basis points from currency, partially offset by a drag of 300 basis points due to higher manufacturing costs. For the balance of the year, we expect this trend to continue. Moving to marketing. Marketing was $29 million, up year-over-year. Marketing expense as a percentage of net sales was 9.1%, or 130 basis points higher than Q2 of last year. For SG&A, Q2 adjusted SG&A increased 60 basis points year-over-year. Other expenses all-in were $24 million, a $9.1 million increase due to higher average interest rates. For the full year, we now expect other expense to be approximately $100 million. We do not have any looming long-term debt refinancing. In fact, other than the $200 million left in our term loan, August of 2027 is the timing of our next maturity. For income tax, our effective rate for the quarter was 17.9% compared to 24.1% in 2022, a decrease of 620 basis points driven by a higher tax benefit from stock option exercises; we now expect the full year rate to be approximately 22%. And now to cash for the first six months of 2023; cash from operating activities increased to $509 million due to higher cash earnings and improvements in working capital. Turning to the full year outlook. Given the strength of our Q2 results and our confidence for the remainder of the year, we’re raising our outlook for sales, gross margin, EPS, and cash flow. We now expect the full year 2023 reported sales growth to be approximately 8% and organic sales growth to be approximately 5%. Given the strength of the business, we see opportunities to make incremental investments in our brands and capabilities in future quarters. We now expect full year reported gross margin to expand 200 basis points. Compared to our previous outlook, we see commodity cost favorability, higher productivity, and faster growth from our higher margin recent acquisitions. While we have seen some pockets of lower inflationary pressure since our prior outlook, we continue to expect net inflation for the year. For perspective, we expect $120 million of manufacturing cost increases in 2023, much better than the $290 million we saw in 2021 and the $250 million in 2022, but still elevated from historical levels. Speaking of history, if we look back at history from 2010 to 2019, we typically had 2% of COGS as inflation. During the COVID impacted years of 2020 to 2022, we saw an 8% COGS impact. And in 2023, we’re seeing about a 4% inflation rate. So currently, we see commodities like ethylene down 20% year-over-year. However, going the other way, we see soda ash up 50%. Soda ash is now used with lithium for lithium carbonate, which is then used in lithium batteries and solar panels. This demand spike is combined with pressure on the supply side. For example, China is the largest supplier of soda ash globally and has had intermittent supply issues, causing upwards pressure on price. So the point is we’re not in a deflationary period as of yet. Wrapping up gross margins, we have made a lot of progress. However, for the full year, we still expect to be about 200 basis points below our pre-COVID margin levels. It’s a lot of opportunity over the next few years. We intend to increase marketing as a percent of net sales to 11%. This is great news as we previously anticipated getting back up to 11% in 2024, and the fact that we’re able to get there sooner than initially anticipated will position the business well for the future. We expect SG&A both in dollars and as a percent of sales to increase compared to 2022. The increase in SG&A is expected to be larger than what was assumed in our prior outlook as strong business performance increases compensation and as we make strategic investments. As in past years when we have strong business performance, we invest for the future. These investments are focused on two areas. First, growth with higher marketing investments and R&D investments around MPD, as well as accelerating product registrations in international markets. Second would be efficiency investments in automation and technology. We now expect full year EPS to be approximately 6%. And as a reminder, our EPS guidance includes a step up of marketing that we’ve been talking about in higher SG&A. We now expect full year cash flow from operations to be approximately $1 billion. Previously, we expected it to be $950 million. The $50 million increase is driven by higher cash earnings and an improvement in working capital. Our full year CapEx plan continues to be approximately $250 million as we continue to make capacity investments. We expect to return to historical levels of 2% of sales by 2025. Strong performance in the first half of the year drove 12% EPS growth, and as a result of accelerating investments, we expect second half EPS growth to be flat. For Q3 specifically, we have a strong outlook and expect reported sales growth of 8%, approximately 4% for organic and gross margin expansion. We also expect a significant increase year-over-year in marketing spend, as well as SG&A. Adjusted EPS is expected to be $0.66 per share, a 13% decrease from last year’s adjusted Q3, as investment spending has weighted more towards Q3. So to summarize, a strong six months of the year are behind us, a return to volume growth in the back part of the year, and a lot of momentum as we move into 2024. And with that, Matt and I would be happy to take questions.

Thank you. Your first question comes from Chris Carey from Wells Fargo Securities. Please go ahead.

Hey, good morning.

Hey, Chris.

So on my math, this is the first return to organic sales growth in personal care since the beginning of 2021, unless I’m calculating that wrong. And clearly, there was some commentary around WATERPIK and vitamins being on plan. Nevertheless, it does feel like a bit of a step change in this kind of important area of the P&L. And I wonder if you could just frame what’s going on, on an underlying basis in that business to drive this reacceleration. I know comps are getting easier, but we hear so much about WATERPIK and FLAWLESS and sometimes, not the rest of the underlying drivers of organic sales here. And really, I’m just trying to get a sense of the full delivery of this personal care portfolio into the back half of the year, specifically as HERO comes into the base.

Okay. I’ll start. And this is Matt, Chris, and then Rick can pile on. So I mentioned WATERPIK and vitamins. So we said on a full year basis that they would be flattish in net sales. So first half, they’re both down year-over-year, and the expectation is up in the second half. So you’re right about that. They’re going to start contributing to the inflection of personal care starting to grow. In international, we have BATISTE and STERIMAR where we’ve been somewhat capacity constrained, and that’s rebounding right now too. So that’s going to help us on the international side. And BATISTE continues to grow in the U.S. It continues to be able to expand, as I mentioned in my remarks, awareness and also household penetration. THERABREATH is a juggernaut. We bought that business probably had around $100 million in sales. Our ambition long-term is for that to be a $0.5 billion business globally. That’s going to continue to grow. We’ve got lots of distribution gains already this year and more ahead of us. The same is true for HERO. We just bought it last October; we’ve got a fantastic team driving that business that have largely all stuck around with us, and we want them to stay for a long time because we have so much success and so much runway ahead of us. So I give you a little sense for a half a dozen brands here that are contributing to the growth.

Yes. And I would probably just add, Chris, it’s Rick. Matt’s exactly right, BATISTE and THERABREATH, all those things are happening. You’re right. Your math is correct. Q1 organically for personal care was negative. Q2 is positive. We expect Q3, Q4 to be positive. So we do see the inflection point as well.

And the good news here is that the high-margin part of the business is personal care.

Okay, yes. And that’s just one thing I wanted to confirm that mix should become a bit more of a tailwind for gross margins in the back half as well. So I think you just – you took care of that. The one other then I’ll get back in. We saw some incremental pricing in the Nielsen data around laundry. Just wanted to confirm that if that’s true or not, sent in the way, if there was pricing taken in the business, and then maybe just contextualize if that was the case, why it happened and how you’re thinking about kind of maintaining value and volume share in the laundry business in the U.S. going forward. Thanks so much.

We haven’t taken any incremental pricing on laundry. I mean, there’s still the impact of concentration as an example, but that’s not really pricing. So we have not taken any incremental pricing.

Yes. And Chris, the only area where we have announced an increase in price to retailers is in baking soda for the obvious reasons with the 50% increase in soda ash that Rick made reference to.

Okay. Thanks so much.

Yes.

Good morning. Thanks for taking that question. Also, congrats on a really nice quarter.

Yes. Thanks.

So just going back to your comment here in the U.S. consumer business where I think you gained share on six out of your 14 power brands category. How are you thinking about this for the balance of the year? Do you expect that metric to improve as we get to Q3 and Q4, especially as maybe some of your advertising picks up?

Hey, Rupesh, we do think we’re going to improve that as we go through the year as our marketing investments are behind it. As our fill levels comp year-over-year are comparable. But I think even a better metric is instead of 6 of 14, we’ve been talking about 65% of our net sales have gained share. So that’s our large brands are winning.

Yes. And Rupesh, some of the categories in personal care that are down are like battery pregnancy test kits, cold shortening; these are small categories, so but they count as one of the 14. So we’re trying to get the focus more on the big brands and how they’re performing.

Okay, great. And then given we’ve seen margins approved not only for you guys but also other players out there just curious what you’re seeing the competitor promotional backdrop right now, then just how you think about the promotional environment for the balance of the year.

Yes. Well, look, as far as promotions go, generally the conversation goes around household. So if you look at the laundry category in total, it’s sequentially, it’s up about 80, 90 bps from Q1 to Q2. And if you look at liquid laundry detergent, that’s up a couple of hundred basis points in sold on deal from Q1 to Q2. On the other hand, if you look at unit dose sequentially, it’s down 340 basis points from Q1 to Q2. So all in, I’d say if you look at the laundry category in total, it’s not any – not significantly more promotional in Q2 than Q1. And then if you look at laundry, or pardon me, a litter sold on deal, just the last few quarters, it’s been pretty steady. It’s been around 15% sold on deal. So I would – and then the last one would be a vitamin business VMS. That actually is less promotional in Q2 than Q1. So I would say that from where we sit and we look at our most promotional categories, we think it's that things are pretty steady.

Okay, great. Thank you. I’ll pass it along.

Okay.

Your next question comes from Peter Grom from UBS. Please go ahead.

Good morning, guys. This is Bryan Adams on for Peter. Thanks for taking a question. So just looking at the implied, I think you said up to or the back half that implies around up to 2.2% or a little over 2% growth in volumes in the second half. Should we be thinking about that as a sequential build or is it more just looking at the year ago comparisons with how challenging Q3 was? Is it reasonable to expect that Q3 volumes might be on par or even above that of Q4?

Yes. Hey, Bryan. We’ve kind of said up to 50% in the second half is going to be volume-driven. We think that is impactful. It inflects positively; I think because of the comp, maybe Q3 is a little bit better than Q4.

Okay, great. And then just one more quick one on specialty products. I think entering the quarter, the expectation was for that business to be slightly negative this year, and you’ve had another choppy quarter here. I know you called out the reasons why with the lower price import. I think on par from an expert on the puts and takes of the business here. But just looking ahead, should we expect kind of a similarly challenged backdrop as we head into the second half? Are you expecting any improvement here? Thanks.

Yes. I’ll give you the division kind of organic outlook here we are in July, so approximately 5% for domestic, 6% to 7% for international, and negative for SPD. And that gets us to approximately 5%. So we continue to think we will have the same issue that we experienced in Q2 for the balance of the year.

Awesome. Thanks, Rick. Thanks, Matt.

Your next question comes from Lauren Lieberman from Barclays. Please go ahead.

Great, thanks. Good morning. I just want to maybe try to ask a bit of a longer-term question, which is that now, it feels you’ve got really good visibility into gross margin recovery to pre-COVID levels, through the worst in terms of kind of the discretionary driven volatility on top line, and with all of that reinvestment setup to get back to not quite 12%, but a huge step change this year. Now things are kind of more settled, if you will. You also talked about some incremental investments in efficiency. And so I was wondering if we could just hear a little bit about kind of longer range planning as you think about investments in capabilities, in supply chain, which I know we’ve talked about in pieces, but if you kind of think over a multi-year view, perhaps how you think about investments that you may want to be making more in kind of infrastructure to support the business with the hindsight being 20/20 of some of the operational headwinds that you ultimately faced during the global pandemic that nobody could have planned for. Thanks.

Yes. It’s a good question. Hey, you’ve heard us say in the past that we think that sales per employee is an underappreciated measurement of a company’s performance. But we focus on that quite a bit. And Rick can kind of chime in with some details, but we look at how do we make our people and the plants more efficient through automation, and how do we do the same with respect to the white-collar office workers. We’re going to be close to $6 billion in sales next year; we got around 5,000, it’s 5,200 or 5,300 employees. The goal here is can you continue to grow your top line without necessarily growing the number of plants that you have or the number of employees that you have to make the team far more efficient. But Rick can give you a couple of examples of RPA in the number of projects we’ve done in the past and how many we plan to do this year and in the future as an example. of how you try to make your office workers more productive. And of course, we like so many other companies out there are now looking to AI and chat and say, well, how can we leverage that to make everybody more productive? But Rick, you can throw a few examples on the table.

Yes. So it’s all in the backdrop of making sure that our evergreen model of 25 basis points of SG&A leverage each and every year is solid for the next five to ten years. So two examples, like one Matt mentioned is RPA. So one of the investments we’re making right now with automation and technology is, we have 20 or 30 projects that represent thousands and thousands of hours that we’re automating. That way, our people have more capacity to do other work, which is really impactful as we build the company. We have more and more brands every day. The second one we’re doing is we’re making significant technology investments. I think you’ve heard us talk about before, but we put an ERP system into China, as an example, we’re investing into an ERP system for our GMG business, which is our fastest-growing international business. So we’re putting technology, we’re enabling technology to scale and grow. We have SG&A investments for people and regulatory and R&D, so that business can continue to grow at the rate it’s been growing.

Okay, great. Thanks so much.

Thanks, Lauren.

Your next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead.

Hey, good morning guys.

Hey, Dara.

So just along the vein of the last question, clearly, a lot of reinvestment in the back half of the year relative to original plan. Can you just talk about the level of payback you expect from those investment areas, as well as the timing of payback? Obviously, marketing is a line item that’s highly visible to us, but it seems like there are a bunch of other areas in terms of higher R&D, greater registrations technology, you just mentioned ERP in China, Rick. So those are more nebulous and harder to judge. So just how do you think about the payback? And are you basically pulling forward some incremental investment that would’ve occurred in 2024 as we think about this reinvestment in the back half of the year? Thanks.

Yes. So in terms of payback, we’ll start with marketing. Marketing, we’re spending $30 million more; where are we spending that incremental marketing? Well, it’s around brands like THERABREATH, like HERO, the ARM & HAMMER campaign given the hammer, which has been great in the recessionary time. So all those things are driving the top line. We’re seeing an immediate payback, right? We talked about distribution gains for THERABREATH and HERO. Sometimes, these are the first national campaigns they’ve ever experienced and consumption is on fire, and that’s as a result of marketing and distribution gains. So the payback there is rapid. On the SG&A, two-thirds of that SG&A number is incentive comp year-over-year as our results are outperforming. And then maybe one-third is the investments. And those investments are more one-time in nature. And yes, like for registrations, we’ve pulled forward a couple years of registrations; we may do that again in terms of it gets us ready to grow even faster, and it gives you more optionality to expand in different countries around the world. Anything, Matt, you would add?

Yes. I’d just say, Dara, we’re very consistent. We had a long-standing practice that when the business is performing well, we look at that as an opportunity to reinvest. So things we – initiatives we might’ve had next year, the year after, we say, hey, we could fund it now, let’s do it. And as with respect to marketing, that’s really a no-brainer. Because marketing correlates with the health of brands and the strength of your brand equity; you can’t live at 10% of sales. And there’s another example of something we were going to ramp up in 2024 that we got ahead of it now. So that is not going to be a drag year-over-year in 2024 versus 2023. I think these are all good things.

That’s helpful. Thanks, guys.

Your next question comes from Andrea Teixeira from JPMorgan. Please go ahead.

Thank you. Good morning. I wanted to ask more about your point on volumes for the more discretionary categories. Not to take away from obviously the improvement in the other areas and the down trade that you benefit, but some of these categories, of course, the 20%, I believe is still around what they represent in your revenues. So I understand that your company very easy comparisons. But consumption-wise, I wonder why consumers will go back to FLAWLESS and WATERPIK given the headwinds in the category. And in general, I think we’ve heard all companies talk about like, well, we will see volumes rebounding. It’s not like your volumes were relatively outperforming, so I wonder x those two or those three categories, including VMS. So what makes you comfortable with the rebounding volumes that are predicated in your guidance? Thank you.

Yes. Well, let’s start with FLAWLESS. We haven’t said a word about FLAWLESS, nor will we, it’s a small brand for us now. First, WATERPIK, just remember, we enter the year, if you go back six months, we said, hey, the first six months, we’re going to be choppy here. We had inventory in the channel that we had to work through. We had an imbalance out there that’s behind us now. So that obviously has a direct impact on our sales in the second half. And the same with vitamins. That was our biggest problem child when it came to supply in 2022. We got punished for that by suppliers where we lost displays, and in some cases lost distribution. So consequently, we took that on the chin in the first half, but that started to improve in the second half as far as the number of displays we’re able to get in. And some of the variants that we weren’t able to make last year that we’re going to start introducing: backend example, a magnesium gummy for example. So for those two businesses, we would say there are reasons to believe that they’re going to start inflecting in the second half.

Yes. And so I’ll just give you a couple comments too, Andrea. In the back half of 2022, those businesses were down. So we expect those businesses to be really, like Matt said earlier, a couple of them a little positive in the back half and really flat for the year. But when you add up all those three businesses and the impact they’ve had on the company, I’ve quoted it a couple of times, but in Q4 it was a 4% drag, in Q1, they were a 3% drag. In Q2, they were only a 1% drag, and we expect them to be flat in the second half. So it’s already improved, I guess, what we’re saying.

Your next question comes from Steve Powers from Deutsche Bank. Please go ahead.

Thanks. On VITAFUSION, just maybe a little bit more detail on your visibility into stabilization and kind of winning back those retailers and consumers? Just kind of where you are in the process and how long you think it will take?

Yes. Well, a lot of work has been done in this business. We’re relooking at our packaging, our graphics, our messaging; the black eye we got last year gave us a chance to stand down and take a hard look at the brand and look ahead. I think over the next 12 months you’re going to start seeing some changes on shelf and how we go to market. I wouldn’t disclose any more than that right now. Anything to add, Rick?

Yes. I mean, for vitamins, I think it’s when we have our TDPs get impacted a little bit because we’re in the penalty box for supply, and we got to do what Matt alluded to. We’re going to get – we’ve gotten more displays, we’re adding advertising, we’re looking at our messaging, and then it takes nine months or so to make that case for the retailer so you can get the distribution back into a leading position.

Okay. Okay, thanks for that. I guess just going back to maybe kind of the question Dara raised and that Lauren brought up on the reinvestment rates. I think the reinvestments you’re doing now were very well telegraphed and as you’ve articulated, necessary for lots of reasons. But I guess the idea, Matt, as you outlined it, the history of the business has been when things are good, you reinvest kind of get ahead. I guess to me, there’s a little bit of tension between that dynamic and then the other side of it trying to catch up from sort of a lost year in 2022. So as you go forward, do you – is the philosophy to run the business as you have from here forward, which effectively means we’re kind of getting back to more of an evergreen mentality off of this newly established base? Or is there more of a desire at some point to recoup some of these upfront investments and kind of return to trend off of maybe a 2021 base? Like how do you think about that from just how you’re managing the business from here?

Yes. Well, look, I’ve been here for a long time, since 2006, and we’ve lived with our evergreen model for many, many years and it’s served us well. Last year was an anomaly for us. And we said, okay, we’ve got to get back to our algorithm. We said we had a big step-up in 2023, and by virtue of what we’ve shown in the first half we’re going to get to 6% EPS growth in 2023. We’re going to get marketing back up to 11% of sales, which is how we want to run the railroad. And we sold 200 basis points light versus what our gross margins were pre-COVID. So when we get to the end of 2023, that’s ahead of us. It’s going to take us a few years to get back there, but as we improve our gross margin in 2024 and 2025, that’s obviously going to throw off a fair amount of profit. So if you look at the first half of this year, we had double-digit gross profit growth. That’s a great trend. The short story is that the success we’ve had in the first six months and the strength we see in the second half, certainly on sales and gross profit growth gives us greater confidence, so we can return to our normal evergreen model algorithm in 2024. But we’re not – it’s too early to be calling numbers at this point, but I think going to 11% of marketing as a percentage of sales this year is a big deal. It won’t be a headwind in next year, that 2024 versus 2023, and we still have the ambition to grow gross margin significantly in the next couple of years. That’s a short story about how we think about the P&L, Steve.

Okay, thank you very much.

All right.

Your next question comes from Anna Lizzul from Bank of America. Please go ahead.

Hi, good morning. Thank you for the question. I was wondering on the distribution gains with HERO and THERABREATH. Could you comment on where you’re seeing the largest gains in distribution with your various retail partners? And are there any challenges to gaining distribution? Also, to what extent do you think you have more runway on distribution? And do you have any concerns from some of the larger brands that have been innovating in this space with similar offerings that might have distribution already well established? Thanks.

Yes, and when I – as I go through, you’re going to have to remind me about the question three and four. As far as where the distribution is coming from, you take HERO. So HERO was built through Amazon, Target, and Ulta, and those were the mainstay retailers that the HERO team chose to grow their brand. So consequently, every other retailer in class of trade is an opportunity for us. And so we’ve – that’s what we’ve been pursuing. We’ve been going after mass, which would be companies like – retailers like Walmart, the big drug chains, etc., and then food. The opportunity is A, would be distribution and B would be facings. Now, if you go to THERABREATH, THERABREATH was more developed as far as the – throughout many classes of trade, but not with respect to facings and how many variants are shown. So there are two things happening with THERABREATH. One is, yes, we’re getting more retailers, but we’re spreading out more on the shelf. And as – because this is the – actually the highest priced mouthwash, it’s accounting for 50% of the category growth in mouthwash in Q2. Now the retailers see that; their penny profit is high on THERABREATH mouthwash. Consequently, they’re interested in helping us grow. So we can anticipate more facings in the future, particularly in 2024. Both of those brands have a big tailwind going forward.

Yes. And I would just add, Anna, that both of those brands have a lot of runway left on TDPs. Even if you look at THERABREATH for example, it’s maybe third or fourth in the segment on TDPs. The next step change maybe is another competitor that has 1,100. So there’s still room to run.

Yes. I mean, the velocity and the sales that we have would suggest that we should have far more shelf space than we have today.

Thank you. And just any concern, I guess, from some of the larger brands that have been innovating in this space with some similar offerings that already have some distribution well established? Just any concern from that?

Yes. Are you referring to the acne category?

Yes, both in the acne category and in the mouthwash category?

Well, look, we welcome competition. As far as patches go, the advantage MIGHTY PATCH has is number one, it was first and number two, its patch is more efficacious than other patches. So I think that is what’s going to make the difference going forward. Yes. And as far as THERABREATH goes, THERABREATH’s got a different formula than other mouthwashes, even in the mouthwashes in non-alcohol. So no, I would say, we feel an advantage with respect to our offering. Not just our formulas, but also our packaging and our go-to market strategy and our use of social media.

Thanks. Good morning.

Hey Bill.

Hey just a little bit more on sodium bicarbonate. Just I don’t remember, maybe you said what the percentage that is in terms of cost goods sold, but also – because I always enjoy the discussion on animal husbandry. I thought the key part of the Specialty Ingredients business was feeding sodium bicarbonate to cows to produce more milk. So why would that business not be passing out pretty meaningful price increases as well and driving sales?

Yes. Sodium bicarbonate is not a big part of the animal business within SPD. As far as the – we got into the animal business about 50 years ago when we learned that we were selling super sacks of baking soda to big bakers and they were selling out the back door to some dairies, and they were sort of used putting in the feed was sort of like Alka-Seltzer for cows. That then got us into other nutritional products, prebiotics, probiotics over time. So the story with respect to soda ash and sodium bicarbonate is largely on the consumer side of the business. Now, especially product business, two-thirds is animal, one-third is bulk sodium bicarbonate. And there you would see that we have been raising prices. But this is just a – it’s a $100 million business, so it’s not a real needle mover for us, Bill, when we raise prices in bulk sodium bicarbonate.

Got it. So it’s not enough to drive sales.

Yes. On the consumer side, it’s a much bigger deal. We don’t typically quote what percentage of our COGS is sodium bicarbonate or baking soda. But remember, we use baking soda in a lot of different products. It’s in toothpaste; it’s underarm deodorant; it’s in cat litter, laundry detergent; yes, it’s – we use it quite a bit, so it doesn’t matter.

Thank you. Your next question comes from Olivia Tong from Raymond James. Please go ahead.

Great, thanks. Good morning. First question is around marketing. If you could just elaborate in terms of how much of the marketing spend is going towards maybe some more value to your products where you are seeing some of that trade down benefit versus some of the higher-end through THERABREATH, HERO personal care type products?

Yeah. Well, you heard Rick mention that HERO and THERABREATH are virtue being part of Church & Dwight. We certainly have the wherewithal to invest quite a bit on two brands that are growing significantly and have a lot of runway ahead of them. The other place of destination would be which I mentioned briefly in my opening remarks, and that’s our master brand campaign, which is 'Give it the Hammer.' The 'Give it the Hammer' campaign is really resonating with consumers. I’m just talking about your average consumer out there. It’s really resonated with them because it really halos all of our different categories and it’s consistent. We came up with this as we entered the year and we said, hey, we got all this trade down going on. ARM & HAMMER is the working man’s brand. So let’s get behind that and let’s come up with a campaign that’s going to support that thesis. And it’s working. That brand is really scoring super high, and we’re continuing to get behind it. We’re going to get behind it in the second half continually.

Okay.

Right. And then just following up, in terms of your expectations for volume to turn positive in second half and being up for the fiscal year, as you mentioned in your prepared mark; can you talk about your view on price mix in second half? And then maybe on price, what’s already in place that hasn’t lapsed yet? And whether you have incremental plans in the second half of the year?

Yes. Hey, Olivia. So there’s – there’s, most of our pricing has lapped. A lot of our laundry, litter, OxiClean pricing happened in July a year ago. So most of the pricing has been lapsed, and there’s a little bit still to come. That’s why we’re saying maybe 50/50 in the back half of the year. And then the only price in action that we’ve talked about is baking. That’s the only one left from a list price perspective. We always want to go optimize trade and revenue growth management, but with the 50% increase in...

Yes. And BATISTE would be the other one that we haven’t completely lapped. All the price increases, so that’s going to be part of the story for price in the second half is dry shampoo.

Great. Thank you.

Okay.

Your next question comes from Filippo Falorni from Citi. Please go ahead.

Hey, good morning, guys. I wanted to ask a question on private label. I know some of your larger categories don’t have a lot of exposure, but maybe you can comment on private label performance in some of the categories that do have the exposure? And then Matt, your point on consumer trade down, kind of starting to cycle that. What are you assuming in your second half guidance, you’re assuming a continuation of the trend, an acceleration of the trend, or just trade down; any color will be helpful? Thank you.

Yes. Well look, there’s a half a dozen categories where we have the private label competition and I would say litter is usually the one we’ve talked most about. But that’s been stable. For the last three quarters, it’s around 13% Q4 – Q1 and Q2. As far as trade down goes in household, it’s a consumer is more likely to trade down. Now we’ve talked about trade down within laundry to ARM & HAMMER, we’ve had four quarters of that, as I just mentioned in the previous question. We do – based on how July is setting up, it looks like that’s continuing to happen. I do expect it’s going to abate a little bit, but one thing that’s notable about trade down is – is which I said in my opening remarks is that Extra, which is a extreme value detergent. It grew 7.5% consumption in Q2 and it actually gained share. And that was the first time, and that was like 14 quarters that Extra gained share. So that would suggest that there’s a trade down that’s – in Q2. Remember this is our most recent quarter, first time that’s happened in 14 quarters. So you’d say, yes, there’s still a tendency to trade down particularly on the household side. When it comes to personal care, particularly health-related categories, far less likely to see trade down. So I think it’s more of a household story.

Got it. That’s helpful. Thank you, guys.

Okay.

Our last question for today comes from Javier Escalante from Evercore ISI. Please go ahead.

Hi. Good morning, everyone. Another permutation on the spending and reinvestment and what to expect from it in the second half; it feels as if do you guys have built a financial benefit from that spending the higher advertising spending in the second half or not? It’s just basically; you are assuming that you are just rebuilding a baseline of investment?

Well, look, some of it is – it’s hard to parse out, well, how much is restoring your typical spend that to maintain brand health and how much is actually going to reduce your top line. As Rick said, I think it’s more likely that it’s going to help THERABREATH and HERO in the second half. The brands that are already doing extremely well, just port some gasoline on those.

Yes. And Javier, I would say it also positions us well as we enter 2024. So that should be taken into account as well.

And if things continue as well, say, right, that essentially gross margin ahead, top line ahead, that upside, do you rather say close the year with 12% advertising spending or you would rather balance that out and flow some of the upside to the bottom line? Thank you.

Yes. Well, I mean, our outlook is what our outlook is. That’s our best forecast of results. So right now, we’re saying we’re extremely happy that we got the 6% EPS growth while bringing marketing back up to 11%, which we thought was going to take two years. We’re doing it all in one year and also making some investments for the future. So not really ready to talk about what we’re going to do if we have upside to that.

Yes. But look at – just to pile on gross margin expansion, gross profit growing. These are all great things and volumes inflecting some positive in the second half. There are a lot of barrels right now for the company.

Absolutely. Thank you very much.

I will now turn the call back over to Matt Farrell for closing remarks.

Yes. Hey, thanks everybody for joining us today, and I look forward to talking to you again at the end of the third quarter. Have a good one.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.